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Flood risk model could lead to higher insurance rates

By Rebecca Mowbray
Business writer, Times-Picayune, 12.05.2006

A report released Monday by a leading computer risk modeling company could become the latest ammunition for insurance companies to jack up rates and limit the availability of coverage.
The report on New Orleans’ vulnerability to flooding by the California company Risk Management Solutions, shows that New Orleans continues to face increasing risk of flooding from land subsidence, increased hurricane activity and rising sea levels from global warming — but doesn’t take into account the Army Corps of Engineers’ improvements to the region’s flood protection system.

Insurance Commissioner Jim Donelon called the report another blow to Louisiana’s battered insurance market and stalled recovery.

“No doubt it will have a very detrimental effect on our ability to convince insurance companies to continue doing business in our state,” said Donelon, who questioned the validity of using a snapshot of pre-Katrina levees as the bedrock of the report.

“I think it calls into question the credibility of their report. If it’s not real world, if it’s not real time, what purpose is there for disseminating that information?” Donelon said. “I think the rating commission will take that failure of this model into consideration.”
The RMS flood report follows a controversial computer model that RMS released in March that scrapped a century of historical storm data in favor of using a “medium-term” five-year horizon for projecting hurricane risk because of the dramatic increase in storm activity in 2004 and 2005 — a technical sleight of hand that had the effect of boosting the chances of damage from a major hurricane along the Gulf Coast by 35 percent.

The Consumer Federation of America called RMS’ hurricane models “a vehicle for collusive pricing” when they were released, and called for insurance commissioners to reject their use. A number of insurance companies that won rate increases from the Louisiana Insurance Rating Commission this year used RMS hurricane models in forecasting the potential for damage to their portfolio of homes.

The timing of the RMS flood report release couldn’t be worse for the Louisiana Department of Insurance.

After it was revealed last week that St. Paul Travelers Cos. Inc., the state’s largest commercial insurer, will not renew commercial property policies in the New Orleans, Lafayette and Lake Charles areas next year, Donelon and Gov. Kathleen Blanco hastily convened a briefing for commercial property insurers Tuesday afternoon in Baton Rouge. Because Travelers cited concerns about levees as the primary cause for the cancellations in the New Orleans area, the Army Corps of Engineers and the Department of Natural Resources will explain improvements in the region’s levee defenses and plans for coastal restoration while local business leaders plead for more insurance options to ease the area’s economic recovery.

“We are better prepared than ever before for defense against flooding from hurricanes,” Donelon said.

RMS said it can’t take levee improvements into account until they’re done, and saidit would work with the Army Corps and state and local recovery officials on updating its models with new information each year. “If things are changing fast, clearly we need to revisit this every year,” Muir-Wood said.

RMS said it undertook the report to suggest a new way of looking at flood risk as a dynamic challenge with constantly fluctuating environmental variables rather than a static, reactionary effort to build flood protection to solve the weaknesses that are revealed after each flood. Muir-Wood notes that after each of the major floods of the last century — 1915, 1947, 1965 and 2005 — flood protection efforts were undertaken that only opened up more land for development and widened the severity of losses when the next flood hit.

“Each of these floods was worse than the one before,” Muir-Wood said. “There’s been a short-term development of flood protection, then neglect. If you do nothing to improve the levees, the risk increases each year.”

RMS’ report focused on New Orleans and parts of St. Bernard, and took readings from its models at four locations around the city: at the Superdome, on Bourbon Street, in the Lower Ninth Ward and at the intersection of Filmore Avenue and Elysian Fields in Gentilly.

Using its models, RMS determined that there was a one in 55-year chance of flooding in the lowest parts of the city and about a one in 275-year chance of flooding on Bourbon Street, the highest place that it looked at.

Sinking land and rising seas increase the chances of flooding. Every one foot rise in relative sea level increased the risk of flooding at the four locations by an average of 25 percent, or from about once every 41 years to 206 years, depending on the location in the city. Factor in increased frequency of intense hurricanes, and the chances of flooding increase to once every 35 years in the lowest areas of the city to once every 170 years in the French Quarter.

Muir-Wood said that government should manage flood risk so that it can guarantee property owners a true risk of certain odds, such as a 1 in 100 chance of flooding, or 1 in 500 chance of flooding, for example, based on whatever the investment the community decides is worth making. “I think it ought to be a fundamental right,” he said.

But the report does throw Louisiana a bone for potential for flood mitigation efforts. The report says that if the Army Corps builds levees that are three feet taller, it would improve the city’s flood outlook by an average of 125 percent, and if it raised levees by six feet, it would improve the city’s flood prospects by an average of 375 percent.

The Insurance Information Institute called the effort a ground-breaking one to address the shortcomings of national flood protection and face up to the delicate topic of global warming.

“They’re taking a very forward-looking view, and taking a couple of very painful lessons that came out of Katrina and a very difficult topic that doesn’t always find itself in discussion, and that is climate change,” said James Valverde, vice president of economics and risk management at the Insurance Information Institute.

Given last week’s U.S. District Court ruling by Judge Stanwood Duval that levee breach flooding is not the same as a flood from a natural disaster, opening the possibility that some insurers could face liability for flood damage, which is normally excluded on homeowners or commercial insurance policies, Valverde predicted that insurers would be especially interested in the RMS report. “Insurers may need to look at a flood risk in a whole different way,” Valverde said.

The Army Corps of Engineers didn’t see the report as breaking new ground. “I would say that their report is an interesting collection of existing information,” said Dan Hitchings, director of Task Force Hope, which is re-engineering the levees.

Like Donelon, Hitchings took issue with the fact that the report doesn’t take into account the improvements that have been made over the last year. “That’s one of the things that makes the report not have much value. It talks about a situation that doesn’t exist any more. They put that risk right back on to pre-Katrina condition with no known weaknesses.”

Hitchings suggested that RMS and the Army Corps share technical assumptions to make sure that the insurance industry doesn’t end up using one set of data and rebuilding leaders end up using another. “I think it’s important that we share at least on a technical basis so we don’t end up with broadly different conclusions,” he said.

Col. Terry Ebbert, director of homeland security for the City of New Orleans said the report would be one more useful piece of information to help shape the city’s future.

The Louisiana Recovery Authority heralded the report as a validation of its belief that South Louisiana needs to be rebuild stronger, safer and smarter. Miles Bruder, director of insurance policy at the Recovery Authority, said the report will help policymakers to understand how the insurance industry looks at the region, and could provide opportunities for the state to quantify how risk mitigation efforts will pay off if RMS and the state work together in the future. But the fact that RMS hadn’t thought of incorporating coastal restoration efforts underscores that Louisiana officials have a huge job to do in letting the insurance industry know that the state is already taking major steps toward remediating risk.

“We’ve got a job to do as a state - the Governor, the LRA, Commissioner Donelon — we need to sell the fact that we’re committed to managing risk and we’re already doing it,” Bruder said.

Rebecca Mowbray can be reached at rmowbray@timespicayune.com or at (504) 826-3417.